A British entrepreneur ‘committed a deliberate fraud over a sustained period of time’ to artificially inflate the value of his software company by billions of dollars ahead of its sale, the High Court has heard.
Hewlett-Packard (HP) – which bought Mike Lynch’s Cambridge-based firm Autonomy for 11.1 billion US dollars (£8.4 billion) in 2011 – claims he and former chief financial officer Sushovan Hussain ‘artificially inflated Autonomy’s reported revenues, revenue growth and gross margins’.
The American technology giant is suing Mr Lynch and Hussain for around five billion US dollars (£3.8 billion) in what is believed to be the UK’s biggest civil fraud trial.
Mike Lynch leaving the High Court today. He is getting sued by Hewlett-Packard for fraud
The two men deny the claims and Mr Lynch has launched a counter-claim for at least 125 million dollars (£95 million) in damages against HP for ‘a series of false, misleading and unfair public statements’ about his alleged responsibility for supposed accounting irregularities and misrepresentations at Autonomy.
The 53-year-old, from Suffolk, argues that, at the time of the sale, Autonomy was an ‘innovative technology company and a success story’ and that HP ‘botched the purchase of Autonomy and destroyed the company’.
At the start of a nine-month trial in London on Monday, the High Court heard that HP announced an 8.8 billion US dollar (£6.7 billion) writedown of Autonomy’s value just over a year after its acquisition of the company – which it said was because it had found ‘serious accounting improprieties’.
Outlining the case for HP, Laurence Rabinowitz QC said Mr Lynch and Hussain had knowingly caused Autonomy to ‘engage in a programme of widespread and systematic fraudulent’ accounting practices ahead of the sale.
The barrister said Autonomy had been ‘meeting its revenue and revenue growth targets by simply buying and selling third party hardware, without any connection to Autonomy software’.
He added that the firm also used ‘a variety of other fraudulent devices’ to either accelerate revenue or to invent revenue that never existed in the first place.
Mr Rabinowitz told the court: ‘Once these fraudulent practices are stripped away, it becomes clear that, in truth, the Autonomy group was experiencing little growth and was falling consistently short of market expectations.’
He said there was ‘no real doubt but that Autonomy engaged in the improper transactions and false accounting alleged’, and there was ‘no question but that Mr Hussain was one of the architects and chief implementers of the fraud’.
Former Autonomy chief financial officer Sushovan Hussain is also being sued by HP. The company says he was the ‘one of the architects’ of the alleged fraud
HP had to write down three-quarters of Autonomy’s value a little over a year after buying the company
Mr Rabinowitz said the main issue in the trial is the question of Mr Lynch’s ‘knowledge (of) and involvement in the fraud’.
In a written opening running to 894 pages, he said Mr Lynch was ‘a controlling and demanding individual, who took a close interest in the progress of individual deals and sales generally’, and it was ‘inconceivable’ that he was unaware of the fraudulent practices.
Mr Rabinowitz pointed to an email sent by Mr Lynch to the senior management team in relation to a proposed transaction which was in jeopardy, in which Mr Lynch stated: ‘If there is any problem I WANT TO KNOW ABOUT IT IN A F****** MILLISECOND from all of you.’
The barrister added: ‘This is not the stance of a statesman viewing the business from 10,000 feet.’
Mr Lynch arriving at the trial. He claims that the case ‘distils down to a dispute over differences between UK and US accounting systems’
Mr Rabinowitz also referred to another email sent by Mr Lynch to a sales representative in August 2010, which read: ‘You ever send me an email like this again AFTER the event and you are f****** toast, I swear if I could squeeze down a telephone line to California you would get to know directly how the f*** I feel about this.’
Robert Miles QC, representing Mr Lynch, said in written submissions that when HP bought Autonomy the company was ‘highly profitable’ and ‘had a bright future’.
Mr Miles argued that HP ‘mishandled the acquisition’, adding: ‘Even the announcement of the bid was poorly managed, as it coincided with the announcement by HP of poor trading results, deteriorating prospects and the closure (or potential disposal) of significant parts of its business.’
He said that, as a result of ‘various failings’, HP’s ‘planned synergies were never achieved’.
He also submitted that HP had previously calculated that Autonomy could be worth as much as 50 billion US dollars once integrated into its company.
In a statement ahead of the hearing, a spokesman for Mr Lynch – who was present in court on Monday – said there was ‘no fraud at Autonomy’ and that the case ‘distils down to a dispute over differences between UK and US accounting systems’.
The spokesman added: ‘The real story is that HP, after a history of failed acquisitions, botched the purchase of Autonomy and destroyed the company, seeking to blame others. Mike will not be a scapegoat for their failures.’
In separate criminal proceedings in the US, Mr Lynch faces 17 charges of securities fraud, wire fraud and conspiracy in a federal court over the sale of Autonomy and, if found guilty, could face up to 25 years in jail.
Hussain was convicted last April in the US of wire fraud and other crimes related to Autonomy’s sale and is due to be sentenced in May, but is expected to appeal against his conviction.
The High Court hearing before Mr Justice Hildyard, which is due to finish in December at the earliest, continues.
Autonomy: From boom to bust
Autonomy is a software company that was founded in 1996 by entrepreneur Mike Lynch. The Cambridge-based firm originally specialised in analysing mass amounts of data, using research from Cambridge University.
After listing on the US NASQAQ stock exchange in 1998, it grew substantially over the next 13 years to become of the country’s largest IT firms. Autonomy purchased a large number of other technology firms to become a multinational conglomerate throughout the 2000s.
Autonomy, and its subsidiary Aurasma, featured as kit sponsors for Tottenham Hotspur between 2010 and 2014.
The company was purchased by Hewlett-Packard in 2011 for £8.4 billion. However, more than three-quarters of Autonomy’s value was written down by HP a little over a year after its acquisition due to ‘serious accounting improprieties’.